By Ndakaziva Majaka
The Reserve Bank of Zimbabwe (RBZ) is pushing ahead with plans to slash prices and salaries as a way of reducing production costs and improve competitiveness.
Devaluation aims primarily at influencing the competitiveness of a country in the short-term by mimicking the effects of nominal currency devaluation, and it takes the form of a reduction in taxation of labour.
Central bank governor, John Mangudya, said he has established committees researching how best Zimbabwe can reduce its costs across board, in an internal devaluation process, primarily aimed at influencing competitiveness.
Mangudya noted that the United States dollar (US$) is overvalued in Zimbabwe, hurting export competitiveness with exports remaining subdued against a huge import bill.
“Right now we have got the export incentive scheme which we are trying to maintain and it is $200 million.
“Starting now, up to the time it is exhausted we need to have a mechanism of taking this incentive to another level and we think that the best way to do it is through internal devaluation…,” he said, on the side-lines of the launch of Confederation of Zimbabwe Industries 2016 manufacturing survey launch last week.
“What this means is that we are going to reduce our cost structure in Zimbabwe. We need to have more discourse with the stakeholders.
“Right now we have got committees that are working on that… working on the internal devaluation to see how best we can implement the process and so that it takes over from this scheme,” Mangudya added.
This comes as the central banker hinted on internal devaluation plans in his May 4 statement through which he announced that the country was set to introduce bond notes.
Zimbabwe, which adopted a basket of currencies in 2009 — dominated by the United States dollar — after its own currency was rendered worthless by hyperinflation, is failing to compete with its regional peers on exports due to the strength of the US dollar.
In a recent report, RBZ noted that the country had to undertake fiscal and internal devaluation to eliminate the disparity between the current account norm and the underlying current account deficit.
“Fiscal devaluation can be undertaken through a revenue-neutral shift from taxes on labour to taxes on consumption. By reducing the tax burden on exports and raising that on imports, this policy can help to restore competitiveness,” the central bank said.
Several countries, including Denmark and Germany introduced fiscal devaluations with varying degrees of success.
Market watchers say the case for fiscal devaluation is particularly strong for Zimbabwe, owing to downward rigidities in nominal wages, amid a highly overvalued real exchange rate and extensive involuntary unemployment.
In 2014, a local think tank, the Zimbabwe Economic Policy and Research Unit, which was commissioned by the ministry of industry and commerce to conduct a study into cost drivers affecting the country’s competitiveness, called for widespread reforms that would amount to what it terms an “internal devaluation.” Daily News